College Financial Planning From Birth to Graduation
There are four types of federal student loans available:
Direct subsidized loans
Direct unsubsidized loans
Direct PLUS loans
Direct consolidation loans
Direct Subsidized Loans
Direct subsidized loans are available to eligible to those undergraduate students who qualify. To qualify you have to demonstrated financial need. Your financial need is determined by your EFC.
If you qualify, this is the best loan for your student. While on most federal loans you can defer payments until 6 months after the student is no longer enrolled in school at least half time, this is the only federal loan that interest is not accruing. The federal government will cover the interest during deferment.
A credit check is not required, but there are limits on the amount in subsidized and unsubsidized loans that you are eligible to receive each academic year and in total. The limits depend on your year in school and whether you are a dependent or independent student, which is based on information you supplied on the FAFSA.
These loans are eligible for all the key benefits of the federal loan program that are designed to protect you as a borrower. You do not have to repay them while you are enrolled in school at least half time and during a six-month grace period after leaving school. Direct subsidized loans are eligible for several repayment plans that are designed to help you through periods of financial hardship, as well as loan forgiveness programs like Public Service Loan Forgiveness, or PSLF.
Direct Unsubsidized Loans
Direct unsubsidized loans are very similar to subsidized loans with some differences. The major difference is that while you do not have to make payments while the student is at least a halftime student and a 6-month grace period, interest is accruing with the unsubsidized loan. The government is not picking up the tab. Another difference that graduate students are also eligible for unsubsidized loans whereas they are not eligible for subsidized loans. Also, unsubsidized loans eligibility is not based on financial need. All you need to do is apply, it does not matter what your income and assets are, you will receive an unsubsidized loan.
The current interest rate on direct subsidized and unsubsidized loans is 4.99% for undergrads and 6.54% for graduate students. While the interest rate is fixed for the life of THIS loan, you do have apply and take out a loan every year in college (if needed) and those rates could fluctuate. There is an origination fee, which is 1.057%. These are the current rates for loans made after July. 1, 2022, and before July 1st, 2023.
The total maximum amount of direct subsidized and unsubsidized loans that undergraduate students can borrow is $31,000 for dependent students and $57,500 for independent students. (see chart below for all federal student loan limits)
Direct PLUS Loans
Direct PLUS loans are made to either graduate or professional students, known as the Grad PLUS loan, or parents of dependent undergraduate students, known as the Parent PLUS loan. With a PLUS loan, you can borrow as much money as you need up to the cost of attendance – which is determined by your school – minus all other financial aid received.
A credit check is required, but borrowers who have an adverse credit history may still be able to obtain a PLUS loan with a co-signer.
The terms of these loans are not as good as the above loans, which is why you should look at direct unsubsidized and subsidized loans first. The current interest rate on PLUS loans is a fixed 7.54%. They also have an origination fee, which is 4.228% for loans made after July 1st, 2022, and before July 1st, 2023.
There are some key differences between the Grad PLUS and Parent PLUS loans. Grad PLUS borrowers do not have to make payments on these loans while enrolled in school at least half time and during a six-month grace period after leaving school, but interest does accrue. Parent PLUS borrowers can apply for a deferment during these periods but are otherwise expected to begin making payments when the loan is disbursed.
In addition, Grad PLUS borrowers can apply for income-driven repayment plans and are eligible for loan forgiveness programs like PSLF. Parent PLUS borrowers are not eligible for these options, although they may qualify for an extended repayment plan that allows lower payments over a longer period of time. They can consolidate the Parent PLUS loan into a federal direct consolidation loan and thus become eligible for income-contingent repayment plan.
See the below chart (courtesy of studentaid.gov) that shows federal loan limits.
Direct Consolidation Loans
Consolidation loans are a bit different than other types of federal loans. They allow borrowers to combine all eligible federal student loans into a single loan – which is usually done after leaving school – without an application fee.
The interest rate on a new consolidation loan would be a weighted average of the current interest rates on the student loans that will be consolidated, rounded up to the nearest one-eighth of 1%. Consolidation loans are eligible for income-driven repayment plans and other options such as loan forgiveness programs.
There are some benefits to loan consolidation, but you should think carefully about whether this is the right step for you. Consolidating can make repayment easier to manage by giving you a single and possibly lower monthly payment, and one student loan servicer. You can also get access to additional loan repayment plans and forgiveness programs, if you were not already eligible.